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Wage Index 101 [PODCAST]

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The Hospital Finance Podcast

In this episode, we’re pleased to welcome back Cody Bales, Senior Reimbursement Consultant at BESLER, to discuss Wage Index.

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Highlights of this episode include:

  • What is wage index?
  • How wage index impacts hospital reimbursement
  • What hospitals can do to improve their wage index
  • What other factors impact wage index
  • What to know about occupational mix
  • Wage index regulation changes

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Cody Bales, Senior Reimbursement Consultant here at BESLER. Today, we’re going to discuss wage index. Thank you for joining us, Cody.

Cody Bales: Hi, Kelly. Good morning.

Kelly: Good morning. Well, let’s jump into it today. What is wage index?

Cody: A wage index is essentially a value or a factor that’s assigned to a hospital that is the result of comparing that hospital’s cost of wages or labor against all hospitals nationally. There are, of course, many complicating factors that come in, but that’s kind of a basic definition. And to take a step back and provide a little background, the Medicare regulations dictate that payments made to a hospital for patient services must be adjusted to reflect the wage level for that hospital and their area, relative to all hospitals subject to wage index reporting. And as a quick sidebar, subject to wage index reporting generally means short-term acute hospitals and would exclude, for example, your critical access facilities. So, the adjustment can be a positive or negative, depending on how the hospital compares to the national average. The primary basis for a hospital’s wage index factor is certain data that is reported annually through the Medicare cost report, namely wages, hours, and employee benefits. So, this data is collected and aggregated for all hospitals within a geographic area and essentially creates what is called an average hourly wage or average hourly rate. This rate is then compared to the national rate, which results in the wage index factor, again, before lots of other factors are considered.

Kelly: Okay. That makes sense. And how does wage index impact hospital reimbursement?

Cody: The wage index factor that is calculated each year can have a huge impact on reimbursement. Essentially, the final wage index, which is, again, a value that can either be greater than one or less than one, is a multiplying factor to the labor portion of the operating payments that are made by Medicare on each claim. So, the potential is there for the wage index to translate into millions or 10s of millions of dollars in revenue each year. And the impact is only that much greater the further away you get from the base adjustment value of one, or in other words, the farther away you are from the national average. So, obviously, hospitals should be doing everything they can to ensure that the wage index is accurate and reflective of their cost of labor.

Kelly: Definitely. And what can hospitals do to improve their wage index? And are there any commonly overlooked areas?

Cody: Well, proper wage reporting really always comes back to the data that’s reported through the S3 worksheets of the Medicare cost report. So, hospitals should ensure that the hours that are reported there are consistent with the regulations and exclude, for example, any hours associated with bonuses, on-call hours not worked, PTO, buyout hours, etc. Because over reporting of hours essentially results in an understated average hourly wage. It’s also important to avoid mistakes in accounting for hours that are associated with salary reclasses on the cost report. For example, if you reclass salaries for marketing or residency programs, then you need to also account for the hours. There is no built-in mechanism for this on the cost report. So, it’s important that the hours are supported and that the methodology there makes sense. Another potential area for improvement is contract labor. This expense is in addition to salaries paid, and hospitals should have a solid process in place to capture those dollars, and vitally, the associated hours and the documentation that must accompany the cost. There are best practices that the reimbursement department can do in the area of contract labor, but there’s also systemic improvements that could be made involving the AP department and hospital operations, in general. Also, if the organization is self-insured for the cost of health benefits paid on behalf of employees, then the hospital should definitely be taking a look at this arrangement and making sure that the reporting is accurate for this cost.

Another area where hospitals should be taking a second look is in allocation of employee benefits, in general, referred to as wage-related costs in cost reporting lingo. There should be a proper methodology that goes into assigning these benefits to excluded areas, intern’s and resident’s positions, and so on. You shouldn’t, for example, allocate the cost of 401K or pension expense for employees that don’t participate. Also, FICA withholding only applies up to a certain dollar amount as another example. So, there are just lots of factors to consider and take a look at.

Kelly: Yeah. Those are some great tips. In addition to the Medicare cost report, what other factors impact wage index?

Cody: Right. I alluded to this point, but there are other factors beyond the cost report that do have an impact on the ultimate wage index factor. There are mathematical types of adjustments that come in, for example, the midpoint adjustment factor, budget neutrality, but also, there’s more substantive potential adjustments. Hospitals may be eligible, for example, to reclassify from one geographic area to another that better represents their cost of labor or gives them a benefit. So, hospitals should generally be evaluating their eligibility for that, and of course, the potential impact to their ultimate wage index. But even without an actual reclassification, hospitals may see certain geography-based kind of adjustments, for example, the out-migration adjustment or an adjustment based on the rule floor, which is the lowest wage index value that each hospital in the state can receive based on the regs. And another factor is the occupational mix adjustment, which is another adjustment that comes into wages, and it’s based on the blend of staffing that’s deployed by the organization.

Kelly: And can you expand on what hospitals need to know about occupational mix?

Cody: Sure. It’s kind of a lesser-discussed area, but it’s an important component for the final wage index. So, hospitals have to complete the Occupational Mix Survey, as it’s termed, every three years. And it just so happens that 2022 is a survey year, that is, a calendar year, 2022. So, we just passed the deadline for revisions to the previous survey. So, the 2022 survey should be kind of next on everyone’s radar after the end of the year. So, I mean, you could probably do an entire podcast on the subject, but for now, I’ll just say, the takeaway is that to accurately complete the Occ-Mix Survey, it’s really essential to have a handle on payroll and staffing, and more specifically, job titles and job responsibilities. The survey requires breaking down wages and hours for certain job categories, mostly related to nursing, and it’s probably going to require corresponding with various hospital departments, probably including nursing admin, for example, to really get the proper information for reporting. And as a reminder, this is another reporting requirement that critical access hospitals would not be subject to.

Kelly: Sounds like there’s a lot to that. Sounds like that would be a good future podcast topic. But broadly speaking, are there any recent changes to wage index regulations?

Cody: Yes. Not the most recent development, but one from the last few years, is that there was an implementation by CMS of an imputed wage floor for hospitals in all urban states. So, it was something that kind of came back after not being in the mix for a while. But this essentially provides an equivalent to the rule floor, but for hospitals that are located in states that only have urban counties. And on a related note, in the 2023 final rule, there was a change to reverse a provision from a few years back, relating to how the rule floor for each state is established. So, without going into too much detail here, the change is essentially going to mean that the wage data for urban hospitals that reclassify as rule is going to be included in the calculation of the state rule floor. So that was a change for sure. Also, a big one in the 2023 final rule was a provision that caps the decrease for a hospital’s wage index from year to year at no more than 5%. So that will be a nice boost to hospitals that do end up with a large wage index decrease in any given year, kind of no matter what the reason was.

Kelly: Thank you so much for joining us today, Cody.

Cody: Yeah, Kelly, of course. Thanks for having me.

Kelly: And don’t miss Cody’s related live webinar on Wage Index 101 on Thursday, September 22, at 1 PM ET. Register or learn more on our website at We appreciate you all joining us for this episode of the Hospital Finance Podcast. Until next time.

[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit The Hospital Finance Podcast is a production of BESLER, SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.


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